The different types of investors you could meet for your startup
24 January 2020
The first step people often think of in having a successful business is finding a gap in the market and filling it with a service or product. In reality, you need to get your business up and running before you can do this… and that requires a lot of money.
Receiving investments in your startup can be a vital step to getting your business started., but securing startup funding is not always as easy as it sounds. There are many different types of investors around who may or may not be interested in your pitch, for many reasons. Business investors look for projects that they believe will be successful or match their interests or beliefs. It’s important to find a few types of investors you think you’d have success pitching to.
So, there are multiple types of investors you can get funding from. Who’s who – how do they differ from each other? What types of investors could be a good match for your startup?
In this article created by our team at TMS, will explain in more detail about some of the most popular investing types for seed funding startups:
- Accelerators & Incubators
- Angel Investors
- Corporate Investors
- Micro Loans
- Peer-to-Peer lending
- Personal Investors
- Venture Capitalist
Bootstrapping is a feasible option only if you have the money to fund your own startup. In this type, you are investing in your own company. This type of investment most often happens at the idea stage when you are just starting out. You may not have a business plan or pitch yet, and for this reason, it’s hard to attract funding. Putting your own money into the company comes with a myriad of risks, but you get the benefit of complete control over your startup.
Money from bootstrapping is often used for new equipment, supplies, designing a new product or even expanding the business.
If you’re looking at funding your own business, there are different ways you could achieve this. Some people take a second mortgage on their home or borrow money from a life insurance policy. Some retirement accounts will let you borrow money, or you could establish a Home Equity Line of Credit. There are benefits and risks to each of these ways. Make sure you research thoroughly before committing to any course of action.
Banks are not technically one of the types of investors, although they can be a way to get your funding. It’s usually pretty tough to obtain bank loans for a startup or new small business. However, as you get going and start making revenue, they might allow a line of credit, business credit card or merchant advance loan for your business.
You’ll need an in-depth business plan in your hand when you head to the bank. Bring along a complete business description, which should include future opportunities you foresee for the company. The bank wants to see that you are serious about your business and have a plan to get it running. It is also vital to bring a business proposal with you, including your financial projections and an implementation plan, plus a description of what your startup offers.
Getting a loan from a bank where you’ve never been a client is harder than with one who knows you. No matter which bank you go to, you’ll need to prove that you have a way of paying back any loans and managing debt.
Sometimes the Small Business Administration will back loans as well as they have guidelines for partners to follow. Its partners include lenders, microlenders and community development organizations. In some cases, the Small Business Administration will be a guarantor for the loan, which could add leverage to your application.
SBA Microloans and Microlenders
Another of the many types of investors are those institutions who offer microloans. The amounts are generally between $500 to $100,000. The loans are generally given to those who can’t get a traditional bank loan, such as a non-profit. These loans could come from crowdfunding sites or from SBA guarantees.
Sometimes all a startup needs to really get things flowing is a microloan. It could buy you the equipment essential to your business so you can start creating products and therefore earning revenue. For example, a bakery startup cannot start making equipment without an oven (or two). The control these small business investors have is highly variable. If you want to have complete control in your startup, you’ll need to set the terms for this from the outset – in writing.
Angel Investors are those who come to your aid when you’re struggling to find seed money for your startup. They are often entrepreneurial investors with their own business experience who want to help others. They will generally look for a startup that they really believe will succeed.
These types of investors have been trending lately, so most people have now heard of the term angel investor. It will often be a family member or friend of the startup owner who performs this function.
How many times can you expect funding from an angel investor? Generally, it will be a one-off monetary sum. However, sometimes they will offer ongoing financial support. This type of investor is known for offering better terms for a startup than other types of investors. This is because they want the business owner to be able to get the business up and running more than making money off their investment.
Angel investors usually need to register with the U.S. Securities and Exchange Commission (SEC). But if they are friends or family members, they are not officially true ‘angel investors’, and may not need to register. Angel investors are usually given shares in your company in exchange for the investment. Sometimes they will not want this as they just want to make a good return.
Accelerators & Incubators
Incubators and accelerators are a way of furthering your business ideas from the pre-seed stage to fruition. They provide office space, mentoring and connections. Some of the startups with the most potential could come away with seed funding. A company must be invited to participate in one of these programs.
This is a great way to access many different types of investors for startups. If you manage to get accepted into one of these, you could get between $10,000 and $120,000 in funding. With this money in your business, you could go from idea to execution and begin to get some traction in the market. You’ll also have the benefit of learning from experienced mentors and the resources they provide. You may also get the opportunity to pitch to business investors with financial resources. Be ready to commit and work hard, and you could take a lot away from this kind of opportunity.
Venture Capitalists are not unlike Angel Investors. They could also give you seed money for your startup. VCs often invest large chunks of money and can help your company become extremely successful. They can also lend credibility to your business, showing that it’s a serious company with serious potential.
They are most interested in funding startups or new business which show the most potential. Big ideas are not their forte, but the execution is. You’ll find that VCs often want a share of the company and part of the sales profits. They may even want patent rights in return for the investment. They can end up with a large amount of control over your business. You need to think seriously about how much control you are willing to give up in return for investment.
Big companies are now becoming more interested in investing in startups. It diversifies their assets and helps them find up-and-coming talent for their own business. It also gives them a way of keeping up with the volatile and changing business market by having a hand in young and trendy startups. Some are creating their own incubator and accelerator programs while others are investing in completely external startups.
Peer-to-peer lending is a newer, high-tech way of accessing seed funding. You can list your startup online for potential investors to see. This links startup owners with small business investors.
It’s recommended to create a business plan and outline your achievements and goals. You should also prove that you’ve conducted market research, financial projections, and market analysis for your business. It’s vital that you prove you’ve put the work in to create a functioning company. Then people may be willing to invest in what you’re doing because they believe in your vision or work ethos.
These investors will be able to see your credit history, and may only fund those with good credit scores. You can personally negotiate the interest on this investment with the peer-to-peer investor.
Many startup owners begin with investments from family or friends. However, think carefully before accepting this type of investment.
While they may believe in you and your product, it’s not always a good idea to mix business with your personal relationships. The problem is that you’re not only putting your own personal finances at risk, but a loved one’s finances too. If your company fails, you could seriously hurt your friend or family member’s finances, which can cause a lot of drama in relationships.
These types of investors may not give you a lot of money. Sometimes it could range between $1,000 and $200,000. It really depends on the person and their finances. It could be a potential red flag for other investors if you cannot get those close to you to believe in your business.
Critical Components of any Startup
If you’ve read the above list of types of investors, you will see that there’s a wide range of them. While finding investors for startups is a vital step, there are other steps to take as well. Here are some other things you’ll need to do for your business:
Create a compelling website
Creating a good website is not only about the design, but the content. What is your brand voice? What kind of tone do you want to convey? It’s important that your website looks and sounds compelling because more and more customers go online to check you out before buying in person.
A good way to go about creating a fantastic website is to find a great development partner. TMS is a reliable development firm, creative and thorough. TMS partners with companies looking to expand their development capabilities. You should check us out. We’ve created some awesome products over time.
Become a private limited company
You need to register to become a private limited company. This should be done before looking for funding. You need to show potential investors that you are a real company.
Create financial projections and a financial plan
It’s critical that you have financial projects for your company, not only for investors but for yourself. This way, you can see how much you might expect to make and what your outgoing costs could be.
Find wonderful staff
You need to find creative people you trust and believe in to have on your team. You’ll need a fantastic team to get your business up and running.
Joining professional organizations can be vital to success. Use these to meet others in your field, make connections and network. You never know, you may even find a mentor or investor.
If you enjoyed reading this article on types of investors, you should check out this one about startup failure.
We also wrote about a few related subjects like Berlin startups, startup press kit examples, startup advice, startup consultants, financial projections for startups, failed startups, share options, London startups, gifting shares, best startup books and risk management process.